Derivative Exception to Insured v. Insured Exclusion Applies Only to Derivative Suits Brought by Non-Insureds

An Oklahoma federal court has held that a derivative exception to an Insured v. Insured (IvI) exclusion applied only to derivative lawsuits brought by non-insureds, and did not save coverage for a direct claim filed by an insured director that was pled in the alternative as a derivative claim.  T.D. Williamson, Inc v. Federal Ins. Co., 2021 WL 2117054 (N.D. Okla. May 25, 2021).

A director of a pipeline services company filed a direct claim against other directors of the company for breach of fiduciary duty and, in the alternative, brought a derivative claim.  The company sought coverage under a D&O Policy.  The insurer denied coverage under subsection (c) of the IvI exclusion, which precluded coverage for any Claim “brought by an Insured Person in any capacity against an Insured.”

In the ensuing coverage litigation, the company argued that, because the director pled his claim alternatively as a derivative claim, his claim was brought by an “Organization,” not an “Insured Person,” and subsection (c) of the IvI exclusion did not apply.  Instead, the company argued that subsection (b) of the IvI exclusion applied, which precluded coverage for any Claim “brought by an Organization against an Insured Person of such Organization” but included an exception for “a securityholder derivative action.”  The company argued that the derivative exception applied to the lawsuit, and to hold otherwise would render the derivative exception superfluous because “the only way for the . . . carve-out to have any meaning is to recognize that a ‘securityholder derivative action’ is ‘brought-by’ the corporation.”  In response, the insurer argued that applying subsection (c) to bar coverage would not render the derivative exception superfluous because the exception could still apply to derivative suits brought by non-insured persons.

The court agreed with the insurer.  The court determined that subsection (c) of the IvI exclusion operated independently of subsection (b), and that it unambiguously precluded coverage for derivative lawsuits brought by Insured Persons.  The court thus held that subsection (c) precluded coverage for the lawsuit because it was brought by an Insured Person (the director plaintiff) in any capacity against Insureds (the director defendants).  The court concluded that the insurer did not have a duty to defend or indemnify the claim.